We believe InterDigital (NASDAQ: IDCC) can manage its debt with ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. We can see that InterDigital, Inc. (NASDAQ: IDCC) uses debt in his business. But the most important question is: what is the risk that this debt creates?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. Of course, many companies use debt to finance growth without any negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest review for InterDigital

How much debt is InterDigital?

The image below, which you can click for more details, shows that InterDigital had a debt of US $ 368.0 million at the end of December 2020, a reduction of US $ 444.8 million over one year. But he also has US $ 926.6 million in cash to make up for that, which means he has net cash of US $ 558.7 million.

NasdaqGS: IDCC Debt / Equity History March 10, 2021

How healthy is InterDigital’s balance sheet?

The latest balance sheet data shows that InterDigital had liabilities of US $ 295.8 million due in one year, and liabilities of US $ 523.9 million thereafter. However, it had US $ 926.6 million in cash and US $ 86.4 million in receivables due within one year. So he actually has 193.4 million US dollars After liquid assets than total liabilities.

This surplus suggests that InterDigital has a prudent balance sheet, and could probably eliminate its debt without too much difficulty. In short, InterDigital has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt!

Above all, InterDigital has increased its EBIT by 46% over the past twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine InterDigital’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analysts’ earnings forecasts Be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits do not reduce it. InterDigital may have net cash on the balance sheet, but it’s always interesting to see the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. In the past three years, InterDigital has actually produced more free cash flow than EBIT. This kind of big cash conversion turns us on as much as the crowd when the beat drops at a Daft Punk concert.

To summarize

While we sympathize with investors who find debt of concern, you should keep in mind that InterDigital has net cash of US $ 558.7 million, as well as more liquid assets than liabilities. And he impressed us with free cash flow of US $ 121 million, or 182% of his EBIT. So is InterDigital’s debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 3 warning signs for InterDigital you need to be aware of this, and one of them is potentially serious.

If, after all of this, you’re more interested in a fast-growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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